Just reading the phrase “long-term care” can strike fear in a Baby Boomer’s heart. Many assume it’s synonymous with nursing-home care (it isn’t), and believe the cost could ruin them (it could; while the odds are relatively small, there’s still a risk). Many long-term care insurance providers have exited the business and those still in it are charging a lot for their policies.It all adds up to a huge retirement-planning challenge. This article will help you understand the issues, assess the risks, and plan accordingly.
Of all the enjoyable ways to spend your time, thinking about the healthcare challenges you may experience toward the end of your life is probably pretty far down the list. Faithful stewardship, however, requires us to consider all seasons of life, and the last season is one of the most important. It’s a time of life when some of a person’s most sizeable Kingdom investments could be made. It’s also a time when people want the peace of mind of knowing their family could handle the financial burdens of a debilitating illness.
To manage that healthcare risk, should you buy a long-term care insurance (LTCI) policy? If so, with premiums rising quickly, can you afford it? What other options are there?
The big picture
Reading articles about later-life medical needs can create fear about the future. For example, according to Fidelity, a 65-year-old couple would need $280,000 to cover their healthcare costs for the rest of their lives. And that does not include the cost of a potential nursing home stay.
But a closer look at that $280,000 figure is illuminating. If this couple lives another 20 years, they would spend $14,000 per year on healthcare, or $1,167 per month. You might already be spending that much for health insurance, out-of-pocket medical expenses, and possibly contributions to a health-savings account. In that light, $280,000 doesn’t seem so scary after all.
However, as noted, that figure doesn’t factor in a stay in a nursing home or assisted-living facility. If needed, that care would not come cheap. According to Genworth’s 2017 Cost of Care Survey, the median cost for a private room in a nursing home is $267 per day, or nearly $97,500 per year. The median cost of an assisted-living facility is $123 per day, or $45,000 per year. So, let’s assess those risks.
Will you need long-term care?
National long-term care (LTC) statistics are imperfect at best and even can be misleading. The definition of certain terms is critical. Here’s what the research says about some of the key questions related to this topic.
What is long-term care?
According to the U.S. Department of Health and Human Services (HHS), while some long-term care involves medical care, most does not.
Instead, it involves assistance with the activities of daily living, such as bathing, dressing, using the toilet, transferring to or from a bed or chair, caring for incontinence, and eating. It may also involve instrumental activities of daily living, such as grocery shopping, cooking, and cleaning.
How many people will need LTC?
According to HHS data, 69% of today’s 65-year-olds eventually will need some type of long-term care, whereas 52% will experience a high need — that is, a cognitive impairment or the need for help with at least two activities of daily living, which is the point at which long-term care insurance policies typically pay benefits. Because of their longer life expectancy, more women are likely to experience a high LTC need than men (58% vs. 47%).
How long is LTC needed?
According to HHS, among those who need any type of long-term care, that need lasts for an average of three years. Among men who are expected to experience a high need, that need is expected to last 18 months, although 10% are likely to experience a high need that lasts five years or more. Among women who experience a high need, it is expected to last 30 months, although 18% are likely to experience a high need that lasts five years or more.
Working through the math, about 5% of all men are expected to experience a high need for long-term care that lasts five years or more, as are about 10% of all women.
Where is LTC provided?
Keep in mind that long-term care is not necessarily synonymous with nursing home care. In fact, HHS says most people who need long-term care can live at home for many years and unpaid caregivers, such as family members, provide 80% of in-home care.
In large part, the level of care needed is what determines where LTC can be provided. For example, is skilled nursing care needed, or only assistance with the activities of daily living? While reduced mobility could probably be managed at home, dementia likely needs to be managed in a professional-care facility, at least eventually.
Another factor is whether you have adult children and whether they’re willing and able to help out. According to Rand Corporation research, older people with four or more children spend about 38% less on long-term care than those with no children; those with adult daughters spend even less.
Still, the Department of Health and Human Services estimates that 37% of today’s 65-year-olds eventually will receive some care in a facility, such as a nursing home or assisted-living facility.
Rand research says the percentage is higher. It analyzed 18 years of data from the Health and Retirement Study and estimated that 56% of people age 57-61 will spend at least one night in a nursing home in their lifetime. However, it notes that most who receive nursing home care “will experience short stays… at a relatively affordable cost.”
A study by Boston College’s Center for Retirement Research found that among men who enter nursing homes, the average length of stay is less than a year; for women, it’s 17 months. For many, their stay is even shorter, with half of men and 39% of women staying less than 90 days.
However, some people experience nursing home stays that last much longer. According to Rand, someone currently age 57 to 61 has a 10% chance of spending three years or more in a nursing home and a 5% chance of spending four years or more.
What’s the cost and how is it covered?
According to HHS data, about 27% of today’s 65-year-olds are expected to incur LTC costs of $100,000 or more. (Remember, the median annual cost of a private nursing-home room nationally is nearly $100,000.) For 15%, the costs are expected to exceed $250,000.
As daunting as those figures may sound, here, too, definitions matter. These costs are not necessarily out-of-pocket costs. A 2013 analysis of data from the Centers for Medicare and Medicaid Services found that only 17% of all LTC spending was out-of-pocket. Public spending (mostly Medicaid and Medicare) covered 72%, with the remaining 11% covered by private insurance and other private sources.
When looking more closely at how long-term care costs are covered, Rand concluded that only about one-third of people age 57-61 will spend any of their own money on long-term care and just 5% will experience out-of-pocket long-term care expenses exceeding $47,000.
Admittedly, the national statistics on long-term care can be bewildering. Still, they provide a broad-brush view of the average person’s probability of needing some type of long-term care (fairly high), and if so, the likelihood they’ll experience a long nursing-home stay (relatively low).
To better understand your risk, take a good look at your health. Do you have diabetes, high blood pressure, or heart problems? Is there any family history of stroke, heart disease, cancer, or most importantly, dementia? According to the Alzheimer’s Association, the risk of getting Alzheimer’s goes up significantly if you have a primary family member who has had it, and half of all nursing home residents in 2014 had Alzheimer’s or other dementias.
If you need LTC, won’t the government help?
This is an area of much confusion, with many people wrongly assuming that Medicare will pay for a nursing home stay. Medicare typically does not pay for extended nursing home stays, but it does cover skilled nursing care if you are there for rehabilitation purposes following a hospital stay. In those cases, Medicare covers the first 20 days and part of the cost for the next 80 days. Medicare may also provide short-term home health care if you are recovering from an illness or injury, as well as hospice care if you are in the last stage of a terminal illness.
Medicaid, on the other hand, is a state and federal government program that pays for nursing-home services for people with low income and few assets. In most states, it also pays for long-term care services at home. Eligibility and the services covered vary by state. The quality of care may vary as well, as only certain nursing homes are Medicaid-approved.
Should you buy long-term care insurance?
The natural solution to managing the risk of costly long-term care is to buy a long-term care insurance policy. However, the LTCI industry is in upheaval. Many insurers were caught in a perfect storm of underestimating how many claims would be filed and how long they would have to be paid, overestimating how many people would eventually drop their policies, and failing to account for low interest rates that have minimized earnings on their investments.
Those missteps have led to a painful ultimatum for many current LTCI policyholders: Either keep your current benefits in exchange for a steep rate hike, or keep your premiums the same in exchange for reduced benefits. The mispricing of policies also has resulted in massive industry consolidation. According to an insurance industry report, 90% of insurance companies that once offered long-term care insurance no longer do so.
The companies still writing policies are believed to have done a better job of pricing in their future risks. That means new policyholders may be less vulnerable to hefty future rate hikes. However, it also means today’s policies are expensive.
For example, a 55-year-old man buying a policy from Northwestern Mutual that provides $7,500 in monthly benefits for three years after a 12-week elimination (waiting) period would pay $2,205 per year. And that’s without any inflation protection. Building in an automatic 3% annual increase in monthly benefits pushes the annual price to $4,695 for level premiums. Or, he could opt for a starting premium of $2,257.50, but that premium would increase by 3% each year, eventually becoming cost-prohibitive. The same policy for a woman would cost 50%-60% more.
The high cost of coverage goes a long way toward explaining why relatively few people carry LTC insurance. According to an Urban Institute analysis of the University of Michigan’s Health and Retirement Study, only 11% of people age 65+ have a private LTCI policy. Not surprisingly, wealthier people, who have more net worth to protect and can more easily afford coverage, are more likely to carry it. Among those with a net worth of $500,000 to $1 million, 20% have a policy, as do 25% of those with over $1 million.
Your financial health is an important consideration when deciding whether to buy long-term care insurance. Several years ago, The Society of Actuaries suggested that $2 million is roughly the amount of savings needed to be adequately self-insured against the risk of a costly long-term care need.
On the other end of the spectrum, those with savings of less than $250,000 may be better off without long-term care insurance. They will likely find it difficult to afford LTCI premiums. Plus, if nursing home care is needed, their savings would be used up quickly, leaving them eligible for Medicaid.
That leaves people with $250,000 to $2 million in assets as potentially having the greatest need for LTC insurance.
However, these guidelines are only that — general frames of reference. People with more than $2 million in savings may not need LTCI, but some may want it to protect their assets for heirs or other beneficiaries. By the same token, people with $250,000 to $2 million may prefer to protect themselves from the risk of a costly LTC need by some other means (we’ll discuss other options in a minute).
If you decide to buy a LTC policy, key factors that will affect how much you’ll pay include:
The younger you are, the more likely you are to qualify and the less expensive your premiums will be, at least initially. Of course, younger people are likely to pay for their insurance over a longer period of time, raising the total cost of coverage. The risk in waiting is that you may develop a medical condition that disqualifies you from coverage.
Generally, 55-64 is the age-based sweet spot for considering LTCI. You should still be healthy enough to qualify for coverage and, depending on the coverage options you choose, a policy still may be affordable.
People with diagnosed memory loss or arthritis are almost always denied. By the same token, survivors of some conditions, including cancer and congestive heart failure, have been able to purchase policies if they can show that their condition is under control.
This is the number of days that you need to qualify for coverage before coverage actually begins. Options typically range from 12 to 52 weeks. The longer the elimination period (and thus, the more you must pay out-of-pocket before benefits begin), the lower your premium.
Options typically range from $50 to $400
Maximum Benefit Period
This is how long the coverage will last once you start using it. Common options range from one to five years.
Options usually range from no inflation protection to an automatic 5% annual increase.
Scott Olson, a long-term care insurance broker with 23 years of experience, generally recommends buying a policy that provides a large monthly benefit, but forgoing inflation protection. That would help keep the premiums relatively affordable. It would also mean that insurance would cover most, if not all, of the cost of a long-term care need that strikes when you have many years left to live. Over time, as the cost of care rises with inflation, the policy would cover a smaller percentage of those costs. While you’d have to shoulder more of the cost, it would be for a shorter period of time.
Ask about a shared-care rider that gives you and your spouse access to each other’s benefits if you use up your own. That may make coverage more affordable, but not every company offers such policies.
Whether to buy long-term care insurance doesn’t have to be an all-or-nothing decision. You may benefit from buying a relatively small policy that would take the sting out of a costly nursing home stay without requiring an equally stinging monthly premium payment.
If you decide to buy insurance, choose your insurer wisely. Go with a company that’s highly rated by A.M. Best, Moody’s, and Standard & Poor’s, and that conducts significant business in your state. Keep in mind, however, that even strong insurers may raise your rates. While they can’t single out individual policyholders, they can seek approval from state regulators to raise rates on groups of policyholders, such as those who opted for a certain level of inflation protection.
Alternatives to long-term care insurance
Here are other ways to pay for long-term care.
Hybrid Whole Life/LTC Policies
Sales of these policies currently outpace sales of pure LTCI policies by a margin of 2-to-1, according to LIMRA, an insurance industry trade group. Their appeal is the certainty of collecting a benefit — the death benefit. Plus, they provide the option to use a portion of that benefit to cover long-term care expenses. Still, such policies are not inexpensive.
For example, it would cost a 55-year-old man about $5,000 per year to buy a Northwestern Mutual policy with a death benefit of $125,000, a portion of which could be used to provide a $4,200 monthly LTC benefit. With dividends reinvested, the death benefit is projected to grow to $235,000 by age 80; the monthly LTC benefit is projected to grow to $8,760.
It isn’t the LTC rider that makes the policy so expensive (that accounts for just $280 of the annual premium); it’s buying a whole-life insurance policy at age 55.
Personal Investments (i.e., self-insuring)
Consider how much could be accumulated if the money that would otherwise be spent on insurance were invested instead. For example, if the 55-year-old man from our first example invested the same $2,205 each year and earned a 7% average annual return, by age 80 he’d have nearly $150,000 available to use for healthcare. That’s less than the $270,000 total maximum benefit his policy would pay, but by saving on his own, the money is available whether he needs LTC or not.
One of the most attractive ways to self-insure is to use a health savings account (HSA). Accessible to those with high-deductible health insurance policies, an HSA combines the benefits of both a traditional IRA and a Roth IRA. Contributions are tax-deductible. Withdrawals are also tax-free as long as the money is used to pay qualified healthcare expenses, including Medicare (and LTCI premiums). Plus, a number of HSA custodians enable customers to invest their balances.
If the money isn’t needed for healthcare, it can still be withdrawn. However, you’ll have to pay income taxes on the money, which means the account will have operated like a traditional IRA. As long as you are 65 or older, there will be no penalties on such withdrawals. (Note: You cannot contribute to an HSA after joining Medicare.)
If you own your home outright or owe very little, you may be able to borrow a large portion of the equity and not have to repay the money as long as you or your spouse remain in your house. If one of you enters a nursing home and the other is able to continue living on his or her own, you can continue using the loan. When the home is eventually sold, any remaining equity would go to you or your heirs. If the loan amount ends up exceeding the value of the house, you would owe nothing.
People often worry about being a “burden” to their kids. However, there was a time when multi-generational families were the norm and people more readily helped care for their parents or grandparents. Perhaps more families would benefit from open conversations about taking care of each other across generations.
Depending on how much outside help is needed, within-the-family care may cost less than an assisted-living facility and may provide a better quality of life for those needing care in their later years. If you’re the one in need of care, it may be difficult to ask an adult child for assistance, but if you’re the adult child of a parent or grandparent whose health is in decline, consider what you might do to help.
Get your financial house in order
Being able to afford later-life healthcare will be much easier if you take the following steps.
Enter Retirement Mortgage-free
Planning ahead to retire your mortgage by the time you retire will provide helpful financial margin.
Enter Retirement Car-payment Free
It is generally wise to avoid financing or leasing a car, and that becomes even more important in retirement. A true story: After Jennie’s mom passed away and her dad entered an assisted-living facility due to the debilitating effects of dementia, Jennie took the car her mom had leased and turned it in to the dealership. Even though the dealer sold it, that didn’t stop them from trying to collect $25,000 from Jennie or her dad. Jennie sent a collections agency her mom’s death certificate and told them her dad could not afford to pay. That was the last she heard from them, but it was an added stress during an already painful time.
Shore Up Your Health Insurance
Choose a Medigap plan to pair with original Medicare, or a Medicare Advantage plan. Either option can fill in some of the gaps left when using only original Medicare. For example, if you are hospitalized and then discharged to a skilled nursing facility temporarily for rehab, Medicare will cover all of the costs for 20 days, and then 80% of the costs for another 80 days. Some Medigap policies will cover the remaining 20% of those last 80 days.
Consider Where To Retire
The costs of long-term care vary greatly, based on where you live. According to Genworth, in Alaska, the median monthly cost of a private nursing home room is over $24,000; the median in Oklahoma is $5,293. Assisted-living facility costs range from a median of $6,015 per month in Delaware to $2,700 per month in Missouri.
If you’re able to stay in your home while needing care, remember that the cost of property taxes varies a lot from state to state as well. And, as mentioned earlier, living near an adult child who is willing to provide assistance should you need it could be very helpful — financially and otherwise.
Put Your Paperwork In Order
Make sure you have an advance healthcare directive, which combines a living will, a power of attorney for healthcare matters, a guardian appointment, and possibly a HIPAA waiver.
No easy answers
What should you do to protect yourself from the risk of an expensive long-term care need? As you can see, there is no one-size-fits-all answer. To a great degree, it depends on your health, your family’s health history, and your financial situation. Hopefully this article has equipped you with the questions to consider and some viable options.
Thinking about this issue is an essential part of whole-life stewardship. Far better to sort through it before you need long-term care, which can happen at any age. As the Bible cautions, The prudent see danger and take refuge, but the simple keep going and pay the penalty (Proverbs 22:3).